The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Corcept Therapeutics Incorporated’s (NASDAQ:CORT) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Corcept Therapeutics’s P/E ratio is 16.72. That is equivalent to an earnings yield of about 6.0%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Corcept Therapeutics:
P/E of 16.72 = USD12.67 ÷ USD0.76 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Does Corcept Therapeutics’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Corcept Therapeutics has a lower P/E than the average (20.8) in the pharmaceuticals industry classification.
Its relatively low P/E ratio indicates that Corcept Therapeutics shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Corcept Therapeutics, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Corcept Therapeutics shrunk earnings per share by 42% over the last year. But EPS is up 164% over the last 3 years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Corcept Therapeutics’s Balance Sheet Tell Us?
Corcept Therapeutics has net cash of US$232m. This is fairly high at 16% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Corcept Therapeutics’s P/E Ratio
Corcept Therapeutics trades on a P/E ratio of 16.7, which is fairly close to the US market average of 18.0. Although the recent drop in earnings per share would keep the market cautious, the net cash position means it’s not surprising that expectations put the company roughly in line with the market average P/E.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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